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When Giving Your Children Some Shares Might Not Pay Dividends

In a recent case, the Special Commissioners decided that a couple who allowed their three young daughters to acquire shares in the parents’ company at less than market value, should be taxable on dividends paid on the daughters’ shares.

The circumstances of the case were not straightforward, as the parents claimed (but failed to prove) that the share purchase was in some way linked to a loan made to the company but the facts appear to be:-

  1. The parents set up a new company in which each subscribed £1 for one ordinary share.
  2. Some months later, when the company was trading profitably, a further 98 ordinary shares were issued for £98 to both parents (19 shares each) and the three daughters (20 shares each).
  3.  Each year until the company ceased trading, dividends were paid on the 100 issued shares.

Where children under 18 have income of more than £100 that stems from gifts from their parents, the income is treated for tax purposes as belonging to the parents.

In this case, the Special Commissioners decided that the parents had effectively gifted the right to dividends to their daughters (and would not have done the same for a third party) and that the income therefore belonged to the former.

Had the parents been able to show a commercial link between the loan and the issue of the shares, it is quite possible that the outcome would have been different. Yet further proof that documenting what you are doing – and why – is of paramount importance when dealing with the Revenue.



Date: 11th December, 2008
Author: David Mansell


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